If Andrew Ross Sorkin had the self awareness to realize that pretty much everyone with an operating brain cell sees him as a stenographer for Wall Street, he would want to grow up to be Matt Levine. Levine is an extremely clever and engaging writer who has the considerable advantage of being an attorney with expertise in derivatives. Thus when he adopts his usual posture of “Oh, I’ve looked at the details [and he really does] and there’s nothing to see here,” he can paper over any cracks in his argument with far greater success than Sorkin and his ilk.

Mind you, as much as I abhor Levine’s default posture of minimizing financial services industry misconduct as business as usual among consenting adults, what makes him so dangerous is that he’s so damned good at it. He’s enormously entertaining and has the rare ability to give apt yet accurate 50,000 foot overviews of complex transactions, and regularly provides footnotes to satisfy the geeks.

So it’s noteworthy that Levine’s article earlier this week on SEC’s biggest private equity settlement to date, in which Apollo agreed to pay $52.8 million, including $12.5 million in fines, had an unusually critical undertone for a Levine genre piece. Is it because everyone knows that Apollo’s Leon Black makes Mike Milken look like a choirboy, and being too dismissive of Apollo’s wrongdoing would undermine Levine’s posture of being oh so knowing? Or is it that Levine has come to recognize that the sort of grifting that the private equity industry has engaged in so gross (for instance, how it taking unauthorized fees any different than stealing?), that he can only go so far in prettying it up?

Having said that, the SEC order (embedded at the end of this post) is, as usual, weak tea. The agency cites three types of misconduct: charging so-called accelerated monitoring fees, which was responsible for the overwhelming majority of the charges paid by Apollo, issuing fund financial statements that misrepresented a loans made by Apollo funds for the purpose of deferring capital gains taxes by Apollo principals, and roughly $200,000 of personal expenses charged to funds by an Apollo partner who was eventually fired, allegedly over these expenses.

Before we get to what the SEC dinged Apollo over, what’s striking is what the SEC chose to let Apollo get away with. As Gretchen Morgenson pointed out earlier this year, Apollo admitted in its Form ADV filing to having negotiated discounts for legal services while it charges investors a premium rate. This is particularly cheeky when you understand that the reason that Apollo can get hefty discounts is that the volume of legal work generated in the course of buying and companies on behalf of investors, as well as the related tax fancy footwork, is ginormous and dwarfs the legal work for Apollo proper. The very same abuse was part of a $39 Blackstone settlement in late 2015. So this is yet another example of the SEC pattern of engaging in token enforcement actions, singling one firm out for an abuse, ostensibly to tell the others to shape up. But why should other investors who’ve lost money to which they were entitled be shortchanged by the SEC’s complacency? Moreover, the SEC’s open posture of very selective enforcement, combined with “cost of doing business” fines, is almost an invitation for firms to keep cheating.

As followers of private equity chicanery know, monitoring fees are already plenty dodgy. As we’ve discussed, they are foisted on companies that the general partners control, and they get the fees whether the general partner gets out of bed or not. That raises the issue that these are really disguised dividends, paid preferentially to the general partner, and should not be deductible to the portfolio companies. But tax issues are outside the SEC’s purviews. The SEC has made its enforcement actions about disclosure, and what the agency is targeting with accelerated monitoring fees is investors weren’t told that the portfolio companies would be charged large lump sum fees, “accelerating” the monitoring fees that were due to be paid over the remaining life of the monitoring agreements.

With that as background, let’s look at how far Levine goes in trying to dress up the SEC order. His headline is a classic by virtue of failing to mention that Apollo paid a big settlement:Apollo Paid Itself Some Fees and Gave Itself Some Loans. Translation: Apollo engaged in some normal-sounding activity. Aiee.

Levine then starts out with the small-potatoes abuse of the partner expenses, but does ding the SEC for having been unduly protective of Apollo for not having described exactly what the expense abuses were about, when it normally makes a point of maximizing the embarrassment by presenting them in detail. As he writes:

It’s almost like there are two genres of SEC enforcement action: The funny ones against two-bit Ponzi schemers, and the Very Serious ones against big firms.

But it would have been nice if Levine had also called out the SEC for that sort of behavior in more consequential part of order. Levine makes crystal clear that monitoring fees are an exercise in extraction (emphasis his):

The basic idea is that private-equity firms charge their portfolio companies a “monitoring fee” for … monitoring them? It seems silly to insist on a reason. They charge the monitoring fee to get more money. They could charge portfolio companies a Fee For Being Nice Guys, and the portfolio companies would cheerfully pay up. The way private-equity firms work is that they buy portfolio companies with money provided by their limited partners (pensions and other big institutional investors), and then run those companies on behalf of the limited partners. So the private-equity firms are the (effective) owners and managers of their portfolio companies. They can send a portfolio company a bill, and then send themselves back some money. The guy sending the bill is also the one paying it, but with the limited partners’ money. You can monitor, or you can not monitor, but either way you charge a monitoring fee, because the emphasis in “monitoring fee” is solidly on the word “fee,” not the word “monitoring.”…

This all sounds like a racket, and it is a racket, but to be fair it is a well-known racket of private-equity investing, which is that the private-equity firms keep dreaming up amusing fees to charge to their investors and portfolio companies, and the investors keep discovering those fees, and each time they chuckle appreciatively and say “I tip my hat to you, Apollo, really well played old chap, charging those monitoring fees for not monitoring.”

Now let’s get real. If Matt Levine had ever bothered watching a CalPERS Investment Committee meeting, and had seen, say, the Chief Operating Investment Officer deny that CalPERS could find out what it was paying in carry fees, or the head of private equity, Real Desrochers, not understand that the effect of management fee offsets is not to reduce the management fee, but to shift some of it onto the portfolio companies, he’s have a much harder time treating the hopelessly outmatched limited partners as amused by the way they’ve been fleeced by the general partners. He’s telling his readers the falsehood that the power dynamics are balanced, that the general partners and limited partners are engaged a type of sport. In fact, the limited partners are much more akin to someone in denial that they are in a bad co-dependent relationship, or an abused spouse who doesn’t want a divorce because she’s afraid she’ll never live as well as she does now.

But he then does concede the point that the limited partners are unhappy…having just told his readers that if they were savvy like him, they’d be impressed rather than resentful. This is a rhetorical device that Levine has mastered, of first treating bad actions as not a big deal, or proof of the overwhelming cleverness of the perp, as opposed to chicanery or an abuse, and then says “some people think there is an issue” while even then gliding over it. Here’s the next bit:

Actually the limited partners don’t much like this sort of thing, which is why, for instance, Apollo rebates most of its monitoring fees back to the limited partners by reducing the management fees it charges them, though usually not by the full amount of the monitoring fees. (So if Apollo charges a portfolio company $100 in monitoring fees, it will reduce the management fees it charges the investors who own that company by, say, $65. )

Now having cleverly conceded that the monitoring fees are not defensible but the clueless limited partners have unwittingly allowed the general partners to effectively double charge them in all sorts of ways, Levine hand-waves about the acceleration: how is this so bad? Well, gee, as the SEC points out, this goes beyond anything the limited partners were told about in advance, and it reduces what the investors get when the company was sold. So how is that not stealing?

So Levine, taking the position that the accelerated monitoring fees are no biggie, lets the SEC off the hook for this priceless part in the order:

However, in some instances, Apollo accelerated monitoring fees beyond the period of time during which it held an investment in the publicly traded portfolio company. In other instances, Apollo provided services for periods longer than the period for which it received accelerated monitoring fee payments.

So the SEC apparently believes the monitoring fees are something other than grifting that the limited partners were dopey enough to authorize sometime in the distant history of private equity limited partnership agreements, and the general partners, having established that as a norm, are giving it up only by inches, via allowing the to be offset against management fees. We’ve discussed some length why that is an unsatisfactory remedy, versus the more obvious solution of having told the general partners to cut it out entirely.

And here is where Levine is making stuff up:

And then their only recourse was to complain about it. Which honestly isn’t nothing, as recourses go? This was a repeated game: The limited partners are big institutional investors, and Apollo kept raising new funds. And as the limited partners find silly new fees, they seem to be pretty successful at squashing them, or at pushing the private-equity firms to credit those fees against their management fees, reducing the overall cost to the limited partners. The SEC’s accelerated-monitoring-fee cases are basically just an acceleration of this process: The limited partners would eventually have cracked down on accelerated-monitoring-fee thing, but the SEC can shut it down faster and more completely.

No, Matt, there is absolutely no basis for believing the limited partners ever would have found out about these fees. They were unearthed by relentlessly comparing disclosures in limited partnership agreements and the other offering documents to the disclosures made in the IPOs of portfolio companies. Private equity investors never never never read those documents. It does not take place at the deeply staffed limited partners like CalPERS and CalSTRS (the general partners do a great job of keeping limited partners running around to various meetings they host, which the limited partners treat as real work, as opposed to going carefully over the information available to them). The only instance I have ever heard of a private equity investor even looking at portfolio company IPOs is one in Norway….and she didn’t catch this abuse.

Levine similarly chooses to praise Apollo for its cleverness in the lending issue that the SEC was unhappy about…and utterly fails to tell his readers that they had to issue false fund financial statements for the con to pass muster with IRS. How can you possibly dismiss phony fund records? And pray tell, why isn’t the auditor being dinged for this too? Here is Levine’s brush-off (emphasis his):

The SEC is again concerned that this is a failure of disclosure, but I am more interested in it as a triumph of imagination. Apollo’s managers got paid in part with carried interest, a share in the appreciation of their portfolio companies. Carried interest is — notoriously — taxed at favorable rates, compared to other forms of compensation. But why pay yourself your carried interest, and incur a 15 percent tax rate, when you can instead lend yourself your carried interest, and put off paying taxes for five years? You get the money now, and can spend it now, but you don’t have to pay taxes until later. Of course the downside is that you have to pay interest on the loan, but that isn’t really so bad because you pay the interest to yourself. It’s such a nice little trade that I’m surprised that Apollo got in trouble for inadequately disclosing it. It almost seems like they should have bragged about it.

Contrast this with the SEC’s order:

Despite the terms of the loan agreement and the disclosures in the Lending Funds’ financial statements showing that the interest income was accruing, the Lending Funds’ financial statements did not disclose that the accrued interest on the loan would be allocated solely to the capital account of Advisors VI. AM VI’s failure to disclose that the accrued interest would be allocated solely to the capital account of Advisors VI rendered the disclosures in the Lending Funds’ financial statements concerning the interest materially misleading.